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This Week In Tech: Apple, Tesla, and Mobileye

This week was marked by a several events that affected both the stock market on a global level and had an impact on the performance of individual stocks. In this article, we are going to take a closer look at the events related to the performance of Apple Inc. (NASDAQ:AAPL), Tesla Motors Inc (NASDAQ:TSLA), and Mobileye NV (NYSE:MBLY) this past week and give some predictions on the future direction of each stock based on past events.

Given that Insider Monkey has done a lot of research into what the smart money likes and doesn’t like, let’s also analyze relevant hedge fund sentiment toward these stocks. Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by 52 percentage points since the end of August 2012. These stocks returned a cumulative of 102% vs. 48.6% gain for the S&P 500 Index (see the details here). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).

Apple Inc. (NASDAQ:AAPL) shares have fallen by 6.3% in the week as investors worry that Apple iPhone sales could shrink for the first time ever next year. On Monday, Morgan Stanley analyst Katy Huberty wrote that she thought Apple’s 2016 calendar year iPhone sales will decline by 3% year-over-year given the smartphone saturation in wealthy countries. On Tuesday, there was some raw data confirming Huberty’s view that iPhone sales could be weaker than expected, as Apple’s supplier Dialog Semiconductor lowered its revenue guidance for the December quarter to $390-$400 million from previous guidance of $430-$460 million. Given that the iPhone makes up around two-third’s of Apple’s profits, Huberty thinks Apple’s CY 2016 EPS might retreat by 6%.

Given Huberty’s predictions and Apple’s decline, investors wonder if Apple stock will undergo the same type of downtrend it underwent beginning in late September 2012 and ending in June 2013, when Apple shares fell nearly 45% from peak-to-trough. Back then, investors were worried that iPhone margins and sales would fall because of competition from rising giants such as Samsung. Apple solved the problem by announcing big stock buybacks and introducing larger iPhones.

If Apple’s stock contracts this time around, the company won’t have any new products to combat the decline for a while. Many analysts don’t think an Apple iCar will come onto the market until 2020 or later. Apple’s live TV product (which is rumored to have 14-15 channels for $30-$40/month) has been temporarily suspended because of content supplier concerns. Meanwhile, Apple’s iWatch isn’t selling as well as many investors had hoped. Although Apple can introduce new products by buying other companies, there are very few products that can really move the needle for the company.

Fortunately for Apple, the company doesn’t have as much downside as it did in 2012 because it pays a 1.96% dividend yield and buys back tens of billions of dollars of stock each quarter. The buybacks should help buttress any decline, and there is an additional upside catalyst if Congress incentivizes US corporations to bring their international cash back to America in some sort of tax holiday. Apple also has less downside because it’s trading at a cheap forward P/E of 9.81, about half of the NASDAQ’s forward P/E. In addition, iPhone sales aren’t as elastic as bears think because of Apple’s strong China sales (despite the weak Chinese economy). In the weeks ahead, we see Apple shares trading between $100 and $120 until new catalysts show up.

Plenty of hedge funds are bullish on Apple, with Carl Icahn’s Icahn Capital LP and David Einhorn’s Greenlight Capital among the 133 elite funds long the stock at the end of the third quarter.

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On the next page, we talk a little about Tesla and Mobileye.

Tesla Motors Inc (NASDAQ:TSLA) and Mobileye NV (NYSE:MBLY) shares have been trending this week amid a Bloomberg story that 26 year-old hacker George Hotz (also known as geohot) has built a self-driving car in his garage. George Hotz has some esteemed credentials, as he is the first person to hack the iPhone and hack the PS3. With $50,000 dollars and a few months of work, Hotz wrote 2,000 lines of AI code that teaches cars to drive much in the same way as a human does (by learning through observation) rather than going the conventional way of writing hundreds of thousands of lines of code to prepare the car for any situation that should arise. Hotz thinks he will have a finished solution in about four months from now (right now he has a minimally viable product).

This is news for Tesla Motors Inc (NASDAQ:TSLA) and Mobileye NV (NYSE:MBLY) as Elon Musk apparently made a million-dollar offer to Hotz if his software were to work. Musk implied that Tesla might ‘discontinue’ using Mobileye NV (NYSE:MBLY)’s driving product if Hotz’s solution worked better and award Hotz the contract instead. Partly because of Musk’s comments, Citron Research labeled Mobileye as ‘short of the year’ for 2016. Musk backtracked a little, however, saying:

“We think it is extremely unlikely that a single person or even a small company that lacks extensive engineering validation capability will be able to produce an autonomous driving system that can be deployed to production vehicles… This is the true problem of autonomy: getting a machine learning system to be 99% correct is relatively easy, but getting it to be 99.9999% correct, which is where it ultimately needs to be, is vastly more difficult. One can see this with the annual machine vision competitions, where the computer will properly identify something as a dog more than 99% of the time, but might occasionally call it a potted plant. Making such mistakes at 70 mph would be highly problematic.”

If Hotz’s product works as advertised, Mobileye certainly has a lot of downside, and Hotz’s startup would be worth a lot of money. His startup would instantly be one of the leaders in Artificial intelligence, which is the ultimate winner-take-all of winner-take-all categories. Musk would certainly be right to offer Hotz a job or to try to acquire his startup in the early stages. If Hotz’s product doesn’t work, Mobileye’s fundamental upside depends on whether another company would want to buy it, as it might have a difficult time going against industry giants such as Apple and others trying to do the same thing.

As long as Elon Musk is CEO, we’re optimistic on Telsa for the long run, although its shares lack any upside catalysts in the short term for now. According to our data, 32 funds owned $704.98 million worth of Mobileye NV (NYSE:MBLY) shares (accounting for 7.10% of the float) while 26 funds were long $1.01 billion worth of Tesla Motors Inc shares (3.20% of the float) on September 30.

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Disclosure: none

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